With Q3 Income Down, Whole Foods Suspends Dividend

Whole Foods Market is suspending its quarterly cash dividend "for the foreseeable future" as part of a plan to take a more conservative approach to growth and its business strategy. The organic grocer reported a net income of $33.9 million, or 24 cents a share, in its third quarter, down from $49.1 million or 35 cents a share in the same quarter last year. While third-quarter sales increased 21.6 percent to $1.8 billion, gross profit was down 82 basis points from last year to 34.7 percent of sales.

Whole Foods estimates the negative impact on net income from the Wild Oats purchase to be approximately $4.9 million in the quarter. Comparable-store sales for Whole Foods increased by 2.6 percent while identical-store sales, excluding two relocated stores and two major expansions, increased by 1.9 percent.

Excluding the impact of Wild Oats, third-quarter sales increased 10.5 percent to approximately $1.7 billion.

"Our business model has been highly successful, and we remain very bullish on our growth prospects as the market for natural and organic products continues to grow and as our company continues to evolve; however, the challenging economic environment appears to be negatively impacting our sales," said John Mackey, chairman, c.e.o., and co-founder of Austin, Texas-based Whole Foods. "This, combined with our commitment to maintaining financial flexibility and investing prudently in our long-term growth, has led us to take a more conservative approach to our growth and business strategy over the short term."

Key components of Whole Foods' strategy for the short term, in addition to suspension of its dividend, include reduction of the number of stores expected to open in fiscal year 2009 to about 15. All discretionary capital expenditure budgets not related to new stores is being cut by 50 percent. The company doesn't intend to seek additional funding for the foreseeable future. Cost containment measures have already been implemented for the rest of fiscal year 2008.

"We have not undertaken any of these difficult decisions lightly," said Mackey. "We are committed to improving our financial results and believe these proactive steps are necessary to manage through the current challenging environment, enabling us to emerge stronger and better positioned to realize our growth potential and fulfill our long-term mission and core values."

For the 40-week period, ended July 6, 2008, sales increased 27.2 percent to $6.2 billion. Comparable-store sales increased 6.4 percent, and identical-store sales, excluding five relocated stores and three major expansions, increased 4.9 percent. Net income was approximately $113.0 million, or 81 cents a share. Whole Foods estimates the negative impact on net income from Wild Oats was about $25.3 million.

Year to date, the grocer has produced $267 million in cash flow from operations and received $18 million in proceeds from the exercise of stock options. Capital expenditures were approximately $392 million, of which $283 million related to new stores and about $25 million related to Wild Oats stores.

Sales at the Wild Oats stores in operation during the third quarter were $168.3 million, or 9.1 percent of total sales. The company closed six Wild Oats stores during the quarter, two of which were in connection with the opening of new Whole Foods stores, and reopened one Wild Oats store that had been closed for a major renovation. Sales for the 57 continuing stores were $164.2 million in the third quarter, and comparable-store sales growth was 5.4 percent.

The company estimated the negative impact on net income from Wild Oats in the quarter was about $4.9 million. In the wake of the recent reversal of a denial of the Federal Trade Commission's request for an injunction against the merger with Wild Oats, Whole Foods is currently evaluating its legal options.

In the third quarter, Whole Foods opened four new stores and re-opened a remodeled Wild Oats store. The company also closed six Wild Oats stores, two in connection with the opening of new Whole Foods Market stores. The company ended the quarter with 271 stores totaling 9.6 million square feet. Subsequent to the close of the quarter, Whole Foods opened two new stores and closed one store, which will be relocated.
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